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Bustling with noise in the middle of the day with a rickshaw trying to overtake a bus, while the metro train passes by tracks above a man rushing to make it to his office on time – welcome to a regular weekday in a city. When a class full of potential city corporators were asked what a city was, they said that it was everything a village isn’t. The questions that remains unanswered is: why is a city a city? Is it because of the people in the city, or because of the infrastructure and the location of it?

“A unit of analysis consisting of a collection of buildings, activities and population clustered together in spaces”.

The Census definition is people centric; the definition claimed to be of an archaeologist and a geographer is based on location. However, one thing common to all the definitions is that they relate the city to an “agglomeration” or a “clustered space”.

In his work City Economics, Brendan O’Flaherty explains quite vividly how this agglomeration is of two varieties. One variety is when the agglomeration “arises from having many firms in the same industry, leading to localization economies”. The second is when it “arise(s) from having many people located together, no matter what industry they work in, leading to urbanization economies.”In simple words, localization economies are formed due to advantages of the place, while the urbanization economies are formed due to the people. So to try and answer the question – is it that either the people or the location that makes a city?

Localisation economies are the by-products of cities formed due to positive economies of scale, which are offered by knowledge spill overs and the gains of demand smoothening, as well as easy access to a number of things like innovations, labour, markets, and raw material. All these factors help to create economies of scale for the industries, which translates into economic growth. This further attracts more capital in the form of land (peri-urban regions), labour and entrepreneurship. This entire process turns the wheel to the making of a city.

If not the competition and economic activity within individual industries, it is a cluster of industries and ingenious people that spells the magic for the making of a city. The constant interactions within a small concentration of people who belong to different backgrounds and specialities, leads to the cities being a hub of growth and progress. This spatial interaction not only transforms the economic status of the city dwellers, but also the social structures and the mindsets within the close unit. Some important factors for this transformation are – the anonymity of an individual among a sea of faces and the positive externalities provided by advanced educational and cultural structures to the citizens. The evolving dynamics of the cities are an outcome of interactions of like-minded individuals from the same or varied specialisations which sometimes takes place through the sheer serendipity of being at the same place at the same time.

However, if reasoned further, either of the two reasons for the formation of the city cannot survive alone. O’Flaherty goes further to explain that if localized economies were the answer then all major industries would have been a city in themselves, and if urbanisation was the key then various industries would have concentrated in one region irrespective of the specialisation. But that is not the truth. Industries gain more from setting up plants based on the raw materials and the markets, at the same time, people benefit more from interaction of different specialisations. Hence the answer cannot be either/or. It has to be both. But is it?

In the Indian context, as far as I can trace, the main cause for the agglomeration has been varied. Keeping in mind the mill workers in Mumbai or the diamond traders in Surat, the expansion of particular industries and their auxiliary units has been the cause for the rise of a city. In the context of Bangalore and New Delhi, it is the concentration of administrative-government that has continued for a long period to provide the current status to the cities. Before independence, Kolkata was an important trade centre while Chennai was an important military base. Hence, if studied in detail the current Indian cities owe their origin to the British Empire and localisation economies. However, it is the migration of a heterogeneous mix of people, in addition to the varied minor and major industries, that has kept their relevance alive.

The essence of the current cities lies in the blend of diverse mix of people clustered in concentrated spaces to keep the blood pumping in these cities. Mumbai, the financial capital, is no more just a city for mill workers (much to their angst) with the head offices of all the major corporations and companies from all sectors setting up there. An important consideration for the present city planners in Bangalore is that with the emigration of young software professionals it is not just an army cantonment or a public sector hub anymore. Delhi along with the administrative centre, has also gained financial and cultural prominence, with the growing settlements of varied interest groups in the national capital. Kolkata has maintained its vibrancy by opening gates to the IT and BPO industries, thereby making it a home for professionals from all ends of the country. Chennai, famous as the Detroit of India, is also the centre for medical tourism, banking, finance and software services. In addition to this, it is the migration of the people from the neighbouring rural parts to the closest town which contributes to the outgrowth and the million plus population, so as to make the Census defined cities.

The urbanisation economies have, hence, been a support structure for the upgradation and survival of the India’s urban dream. Therefore, even if the formation of these cities can be attributed to either localisation or urbanisation, the present scenario votes in favour of the urbanisation economies or the people of the cities and so do I. Hence cities are likely about the people.

Over four hundred million people in India live in cities today. In spite of this, there is a lot of confusion about what a city really is. Cities are often seen as overgrown villages, or a group of villages at best. Cities are also seen as having better housing and better infrastructure than villages, and in general better developed. Cities are also seen as places where most of the population is not directly dependent on agriculture as a means of livelihood, unlike in villages. But is that all that separates cities from villages?

Beyond size and development, cities are different from villages in at least seven distinct ways.

First, a city resident belongs to an imagined community. Bangalore residents will think of themselves as a community of Bangaloreans or Bengalurinavaru, for example, but no one knows every Bangalorean personally. A traditional community is one where you actually know everyone personally is in sharp contrast to the community-based life of a village where pretty much every family knows the other personally. Therefore city residents end up becoming a part of an imagined community instead of a conventional one.

Second, the people and places of a city are alien to a city dweller. The large size of the city and the imagined community force the sense of anonymity into city life. In a village however, the community based life and smaller size of the village inject a sense of familiarity in the villager’s life.

Third, cities function more on rules than on norms. For example, the density of traffic in a city needs a rule that people should only drive on the left side of the road and in their lanes. In contrast, enforcing lane driving seems silly if done in a village. Given the large size of cities, you need clear rules that are documented that people need to know in order to maintain order. You also need clear rules to allow any defaulter to be punished. Villages instead run on largely on norms that are rarely written down and are enforced by society.

Fourth, cities need a lot more planning than villages. Cities provide more amenities to larger groups of people, where in villages a lot of the basic amenities are self-supplied by residents. For example, villages could use household wells for their domestic water use, but cities need a public water supply.

Fifth, the city is also from the village in the specialisation of the workforce. Labour division in a city assigns specific tasks to each member of the work force. An average farmer of a village, in contrast, does not hire workers to feed his cattle and plough his fields – he carries out both the tasks and more.

Higher division of the labour in cities leads to the sixth difference, which is that cities have a higher specialization in their work force. After a medical degree, for example, medical practitioners study highly specific courses for degrees in specialization and super-specialization. But in a village, an agricultural worker is employed to perform various agricultural activities – sowing of seeds, ploughing of fields, and more and does not have the opportunity to specialize.

Cities can be considered as having a critical mass of humanity, a microcosm of all of human society that represents its diversity – and thus, population becomes the most obvious and the final significant difference between cities and villages.

Nitin Pai discussed the above theme in his inaugural class on “What is a city?” for B.CLIP students.

Classes for the second batch of the B.PAC Civic Leadership Incubation Programme started this past Friday, with Nitin Pai taking an introductory session.

Government is an institution that prevents society from falling to anarchy, which is social and political disorder wherein every individual operates with their own guidelines of behaviour. Cities need government a lot more than villages as the descent into anarchy can be a lot faster. The government (or more technically, the state) enforces a rule of law to prevent violence and chaos, and promote harmony and smooth functioning of all aspects of a society. An egalitarian city is conceived as having all its residents as equal before the law, and so the functioning of a city depends on citizens subjecting themselves to this rule of law. This method of functioning in a society is characteristic of a democracy, and contrasts with the concept of divine right of kingship (characteristic of a monarchy) wherein the lawmaker is above the law.

Image copyright China Digital Times 2012

“Those who defend authority against rebellion must not themselves rebel.” – JRR Tolkien, The Silmarillion.

It can be argued that the rule of law is more important in cities than villages. As villages are relatively small and less populated, they often lack anonymity, thereby making social norms sufficient to prevent anarchy. A person may find it difficult to wrong another person in a village because they are more likely to know each other as well as everyone else in the community, and the collective enforcement from the community can be enough of a deterrent. There are other frameworks with which to establish a rule of law in other communities. For example, large slums often are illegal and slum lords use this as leverage to take protection bribes; in such cases, the mafia establishes a parallel set of rules which govern behaviour.

Note that while both village communities and slum lords can have their own means of enforcing a certain set of rules, they do not guarantee the same amount of liberty. While liberty is a quality of each state and government, all of them have to be strong enough first to prevent anarchy. In a city, where population and therefore anonymity is high, social norms are not enough to establish common rules for behaviour. The best thing for a city, therefore, is to have an elected government representative of all citizens to establish rule of law in the society. When citizens elect representatives, they form a social contract with the government. With this contract, they exchange some liberties for the protection of others. For example, they exchange their liberty to use violence for the liberty to walk in public safely without being robbed. The social contract with the governing body is more important in a city than a village because in a village, social trust exists with other families. In the anonymous setting of a city, however, a lack of relationship with the rest of the community makes the government is essential to maintain law and order.

This is relevant to aspiring local civic leaders because it is important to recognise that there are many ways in Bangalore in which the rule of law is overlooked or flouted. Enforcing the rule of law is the fundamental duty of the government – providing security, welfare, growth, etc., all stem from this fundamental duty. Therefore, anyone aspiring for public office should pay attention to the rule of law above all else. Governance starts from local leaders at the level of the ward; only when people are responsible citizens of a ward can they be responsible national citizens.

Apoorva Tadepalli is an intern at the Takshashila Institution and a student of development studies and communication.

Today’s Livemint editorial talks about how Indian cities need better leadership and how its current political structure hinders good administration:

India does not have the political structures required to run its growing cities with large budgets. One of the key problems is the lack of quality political leadership at the third level of government (the problem is perhaps even more acute in the village panchayats). The two are linked: talented politicians are unlikely to be attracted to a job that has little power while handing over more power to city governments will backfire unless the quality of urban leadership improves. Much of the debates on devolution seem to bypass this key obstacle. Indian cities need the quality of political leadership that was available many decades ago, when people of the calibre of Nehru, Patel, Bose, Rajagopalachari and Prasad led city governments.

Several countries in the world have empowered mayors. New York mayors such as Rudy Giuliani or Michael Bloomberg can be effective because they have power; Boris Johnson has far more freedom to manage London than his Indian counterparts; the campaign to bring the Olympics to Rio de Janeiro has been led by mayor Eduardo Paes; even many Chinese cities have been hothouses for political talent that later went national. In India, state governments that have traditionally been run by rural elites have not been keen to hand power to city governments that are usually treated as cash cows to fund patronage networks in the hinterland. The way Karnataka politicians have treated Bangalore or Maharashtra politicians have treated Mumbai are two obvious examples.

Karthik Shashidhar, Resident Quant at the Takshashila Institution and B.CLIP faculty, discusses a few concepts in economic reasoning.

How much would you value a pen? I’m talking about a stainless steel fountain pen here, made by the Parker Pen Company. It is a three year old pen in excellent working condition.

Let us say that Anjali values it at Rs. 100 and Babu values it at Rs. 50. Now, what if I tell them that I’m willing to sell the pen, and that the price at which I’m willing to sell is Rs. 75? Will either of them buy the pen?

It might be intuitive to see that Anjali will buy the pen at Rs. 75, while Babu will not. Notice that Anjali values the pen at Rs. 100, which means by paying Rs. 75, she is getting hold of a good that is worth Rs. 100 to her. It is a clear win for her! Why will Babu not buy the pen? Given that he values the pen at Rs. 50, he will only get Rs. 50 worth of goods by spending Rs. 75 – clearly a losing deal.

Insight 1: Price and value are not the same thing. Value is what a particular good is intrinsically worth to you. Price is the rate at which the good is traded.

What would happen if I were to set the price of the pen at Rs. 40? Now, you might see that both Anjali and Babu will want to buy the pen. If the price is Rs. 150? It is intuitive to see that neither will want to buy the pen at that price.

Now let us expand the problem. What if there are a thousand different potential customers, rather than just Anjali and Babu? Let us assume once again that each of them values the pen independently. Now, how will the number of people who want to buy the pen depend on the price?

Insight 2: If you value a good that is for sale at an amount that is higher than the price at which you can buy it, you should buy.

If we were to price the pen at Rs. 50, how many units will it sell? This is exactly equal to the number of people who value the pen at greater than or equal to Rs. 50! If we are to price the pen at Rs. 49? Then it will sell exactly as many units as the number of people who value the pen at greater than or equal to Rs. 49!

You might see a mathematical insight here – the number of people who are willing to buy the pen at Rs. 49 is either greater than or equal to the number of people who are willing to buy it at Rs. 50. How is this so? The people who buy it at Rs. 50 are those who value the pen at an amount greater than or equal to Rs. 50. Now, if an amount is greater than or equal t Rs. 50, it is also greater than Rs. 49. So everyone who values the pen at greater than or equal to Rs. 50 (i.e. people who are willing to buy at Rs. 50) will buy it at Rs. 49. And there are more – what about those people who value the pen at Rs. 49? They may not buy when the price is Rs. 50, but they will definitely buy when the price is Rs. 49! Adding these to the number of people who have valued the pen at an amount greater than or equal to Rs. 50, we find that the number of people who want to buy the pen at Rs. 49 is greater than or equal to the number of people who want to buy at Rs. 50.

Now, we can generalize this rule.

Insight 3: For a particular good, the number of people who will want to buy at a lower price is greater than or equal to the number of people who will want to buy at a higher price.

Now, let us look at selling. Let us assume that everyone in the class has an identical pen. Let us say that once again it is a stainless steel fountain pen made by the Parker Pen Company. Once again, each member of the class values the pen differently. Now, what if I offer to buy their pens at Rs. 50? Who is going to sell to me?

People who will sell me the pen at Rs. 50 are those that value their pens at an amount lower than Rs. 50! Let us say Chetan values it at Rs. 40. By selling the pen to me at Rs. 50, he is giving up a good which is worth only Rs. 40 to him, and getting Rs. 50 in return. Hence, he will sell it to me.

Let us say Diana values the pen at Rs. 60. She will not sell it to me at Rs. 50, because by doing so she is giving up a good worth Rs. 60 and getting only Rs. 50 in return! Hence, the people who will sell to me at Rs. 50 are those that value the pen at Rs. 50 or lower. The people who will sell to me at Rs. 100 are those that value the pen at Rs. 100 or lower.

Like in buying, we have a similar law in selling. The number of people who are willing to sell a good at a particular price is less than or equal to the number of people who are willing to sell the good at a higher price.

The proof of this is similar to that of the buying case, hence it is left as an exercise to the reader.

Now that we know when people buy and when people sell, can we generalize a trade? If A sells something to B at a particular price, what does that tell you about the valuations that A and B put on the good? That A has sold the good means that he values the good at an amount less than or equal to the price at which it was sold to B. That B has bought the good means he values it as an amount greater than or equal to the purchase price!

So, you notice that whenever a trade takes place (unless it is under coercion or any other extraordinary circumstances), both the buyer and the seller are better off than they were before the trade! In other words, voluntary trade is always good.

Marginal cost pricing

Let us say I grow mangoes on my farm, and in season the trees collectively bear 100 fruits a day. Let us say that I am willing to sell each of these fruits at Rs. 10. I take them to the market, where other people from the village buy it from me. As long as the number of people who want to buy it from me is below 100, everybody is happy, for everyone gets the fruit they want, and I get adequate compensation for the fruits I’ve sold.

Over time, the population of the village increases and the demand for mangoes grows. Soon it goes beyond 100, and every day some people are denied their mangoes. Now, my intention is to maximize welfare, so it hurts me to see that people who want mangoes are not getting it. What do I do?

Let us say there is a neighbour who is willing to sell me mangoes, and I can sell his mangoes at Rs. 20 per piece. He has a large farm, so he can supply to me as much as I want every day, but I need to be the one going to the market and selling. What price do I sell them at?

Note that I need to have a constant price through the day. If, let’s say, I price mangoes at Rs. 10 per mango for the first 100 pieces and Rs. 20 thereafter (thus accurately reflecting my cost), there will be a rush among the people of the village to buy the first 100 mangoes. Given that they are no different (in terms of quality or any other “intrinsic value”) than the next few mangoes, this creates unnecessary commotion. As a welfare maximizer, I don’t like people fighting, and want them to come peacefully at any time they want and buy the mango at the known price. In other words, I need to price the mangoes uniformly. The question is what price I should charge for the mangoes. Let us assume that each day I expect to sell anywhere between 150 and 180 mangoes.

Instinctively, you might think that the welfare maximizing price is the average price. For example, if I know that the demand will not exceed 180, the average cost of the mangoes I will sell will not exceed (100 * 10 + 80 * 20)/180 = Rs. 14.44. Does that mean I can sell the mangoes at Rs. 14.44 as a welfare maximizing measure?

Let us see what happens then. If the price is 14.44, I am happy selling the first 100 mangoes, for they have cost me only Rs. 10 each. The question is if I will want to sell the 101st mango. Note that the 101st mango comes from the neighbour’s farm, and I can procure it at only Rs. 20. Now, if I have to sell it at Rs. 14.44, I make a loss on selling the mango. Not just the 101st – every additional mango I have to sell thereafter I have to sell at a loss. In other words, I’m better off selling lesser mangoes than more mangoes! And if I don’t want to sell mangoes I’m making a loss on, in that case I’m not maximizing welfare!

Notice that at any price I set below Rs. 20, I have no incentive to sell any mangoes beyond the 100 I have grown in my own farm! As long as I have set a price less than Rs. 20 (even if it is Rs. 19.95) I have an incentive to pack up my shop early and not sell mangoes to everyone who wants it! Hence, a price less than Rs. 20 does not maximize welfare!

So what should I price mangoes at if I want to ensure maximum welfare? This has to be a price at which I’m as happy or happier selling more mangoes, as I am selling lesser mangoes. This can only happen when the price is greater than or equal to Rs. 20!

Essentially, irrespective of how many mangoes I managed to get (in limited quantities) at a lower price, in order to maximize welfare, I need to price the mangoes at the cost of the last mango I purchase! This means that in order to maximize welfare, I should price the good at the marginal cost of producing that good! In the case of mangoes here, my marginal cost (i.e. the cost of the last mango I buy) is Rs. 20, hence in order to maximize welfare I need to price the mangoes at Rs. 20. This is called marginal cost pricing.

Now, let us draw an analogy of an apartment complex. The complex gets a limited amount of BWSSB water a day, beyond which it needs to get water from tankers. Let us say that BWSSB charges Rs. 10 per kilo Liter, and supplies up to 1000 kL a day. Beyond that, the apartment association has to purchase water from tankers at Rs. 20 per kL. The question is how much the apartment association needs to bill its users for water.

The answer is the same as above. As long as the total demand exceeds 1000 kL a day (the price at which the association can purchase water at Rs. 10), water needs to be uniformly priced at Rs. 20 per kL, which is the marginal cost of purchase!

Now let us look at Bangalore city. Let us assume that BWSSB can sustainably draw up to 10000 kL of water a day from the lakes around Bangalore, and this costs them Rs. 5 per kL. Beyond that, they will need to draw water from the Cauvery, over a 100km away, at Rs. 10 per kL. What should BWSSB price the water at?

Again, it doesn’t matter that BWSSB is a public sector agency, providing a “public service”. We have seen that in order to maximize welfare, we need to price the good at the marginal cost. And the marginal cost of procuring water for the BWSSB is Rs. 10 per kL, hence, every unit must be priced at Rs. 10 per kL.

It doesn’t matter whether we are selling mangoes or water or electricity or brinjals. If our objective is welfare maximization, we will need to price the good at the marginal cost. This is a fundamental principle of economics.

Bangalore City Connect Foundation and the Jana Urban Space Foundation together launched the Tender S.U.R.E project to improve the design of urban roads. Piloting their efforts on Vittal Mallya Road and Walton Road in 2009, the project has been progressing since then. Below is a preview video of the project.

A useful guide for any aspiring corporators looking to improve the road infrastructure in their wards, volume I of the report can be read on Scribd below. You can also check out a presentation by BCCF. More information and videos are available on the Jana USP website.

B.CLIP was featured this week in Open magazine, which includes snippets the lectures of Takshashila Councillor Prof Mukul Asher on public finance and municipal budgeting.

When he throws the floor open to questions, there are several. Predictably, in keeping with the zeitgeist, there is a question about the Aam Aadmi Party. A student asks if AAP can afford to give away free water and subsidised power to the residents of Delhi. Asher’s response is a question. “In the 21st century, what is going to be the commodity that will be the scarcest?” he asks. There is a murmur of responses, then someone gives the right answer: water. “If something is very scarce, would you price it at zero?”

Asher then explains that although a free-water policy may appear to benefit households at the outset, it would eventually hurt them. As water becomes scarcer, the cost of supplying it will increase. Therefore the only way the Delhi government can afford to give its citizens water free is by finding an alternative source of revenue—it can either take money away from other infrastructure projects, or raise water prices for commercial establishments.

The first idea is obviously a nonstarter. And if the government opts for the second, it would increase the cost of doing business in Delhi, forcing commercial establishments to move to other cities. Such an exodus would come back to hurt households, because they are customers and employees of these businesses.

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Welcome to the class blog of the B.PAC Civic Leadership Incubation Program.

B.CLIP aims to create a pool of good civic leaders who will actively engage in ward level management and administration of Bangalore to improve its governance.

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This is a blog by the Takshashila Institution on the B.PAC Civic Leadership Incubation Program (B.CLIP). B.CLIP is an initiative by the Bangalore Political Action Committee, with the Takshashila Institution as the knowledge and training partner.

About Takshashila

The Takshashila Institution is an independent, non-partisan think tank on India’s strategic affairs and public policy, registered in Chennai and with offices in Bangalore. It has pioneered modern public policy education in India through its graduate programme targeted at working professionals in the media, politics, NGOs and the corporate sector. Takshashila conducts policy research in a number of policy domains, supports an active community of bloggers and has been publishing Pragati—The Indian National Interest Review, a monthly magazine on public affairs since April 2007.